On Sep 9, 2014, we issued an updated research report on Merge Healthcare Incorporated (MRGE). After several quarters of drag, Merge posted an impressive second-quarter 2014 with revenues sailing past the Zacks Consensus Estimate and the bottom line improving year over year.
Adjusted earnings per share came in at 4 cents, rebounding from the loss of a penny incurred in the year-ago quarter. Although, pro forma revenues declined 6.1% to $54.1 million, the top line was clearly ahead of the Zacks Consensus Estimate of $53 million.
We are encouraged by the fact that the subscription-based model is gaining traction as reflected in the healthy growth of subscription backlog. It is also commendable that despite the general slowdown in hospital spending, low demand for imaging equipment and related technology due to global credit crisis and macroeconomic factors, Merge witnessed client wins and bookings growth.
In our opinion, the company has immense potential in the diagnostic imaging market, especially with the government emphasis on HCIT and demographic tailwinds. We believe Merge is well positioned to take advantage of this opportunity over the long term.
However, we are, at the same time, wary about declining Medicare reimbursement for advanced medical imaging that could negatively affect hospital and imaging clinic revenues, thereby reducing demand for imaging-related software and services offered by Merge. Moreover, the company’s growth prospect is highly dependent on capital investments by hospitals for advanced imaging solutions, which are in turn tied to general economic conditions.
Merge currently carries a Zacks Rank #2 (Buy).
Other Stocks to Consider
Investors interested in the broader medical sector can also consider stocks like Omnicell, Inc. (OMCL), McKesson Corporation (MCK) and Abaxis, Inc. (ABAX). All the three stocks carry a similar Zacks Rank #2.
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